Mopping Up After the Y2K Mess.

Last fall I wrote about what facilities could do to reduce the risk of waking up with a digital hangover on January 1, 2000, caused by the Y2K bug ("Vaccinating Your Facility Against the Y2K Bug," October 1999, Vol. 48 No. 10). By the time you read this, we'll have a good idea of whether the Y2K bug was actually a man-made disaster or just a lot of wasted fretting. if the Y2K bug has passed you and your facility by, leaving you unscathed, feel free to skip this article. If, on the other hand, a digital hangover persists and you suspect Y2K, read on. You just might have legal redress.

Whether Y2K has meant that your facility's checking account is slightly off or that you have little hope of ever seeing a Medicare payment again, there are steps you should be taking now. They can be the difference between being able to collect for your losses and being legally prohibited from even making a claim. To proceed effectively, I recommend that you create a journal or a comprehensive record in which you document each step and the results. Such a record will help ensure that you don't miss important details and will be extremely valuable if you have to litigate a claim.

The first step is to assess the damage. Use the classic what, when, who and how of journalism: What went wrong? Is reimbursement wrong, late or nonexistent? Are services and goods being delivered on time and in the right quantities? Are invoices correct? Are medical or office devices failing? Closely scrutinize all incidents, transactions and documents, regardless of how mundane or trivial they might seem. With Y2K, some problems might not become evident for weeks or even months. Providers should consider two full billing cycles to be the minimum amount of time for reviewing documents and transactions.

The when of the Y2K problem might be much more difficult to identify. Various periods of time can elapse before the problem is clearly identified. And yet, for the purposes of a potential lawsuit, the when can become extremely important, because courts limit the amount of time in which to file a claim. For Y2K claims, the time frame might be as little as two years from the date that one party or another discovered (or should have noticed) the problem. Timing becomes even more important if your actions have caused a Y2K problem. As will be discussed shortly, failure to promptly notify the federal government regarding a Y2K problem could result in a party's losing a valid defense.

The who might also be more difficult to identify than you think. If most consultants' predictions hold true, it will be difficult to determine who is primarily responsible for Y2K problems. For example, is a failure in Medicare reimbursement the fault of the Health Care Financing Administration (HCFA), the software provider, the phone company, the Fiscal Intermediary or maybe even the United States Postal Service? The question of who takes on even greater importance for potential lawsuits, because a failure to promptly notify a defendant of the problem could hinder the chance of a lawsuit succeeding. To guard against failing to identify the correct defendant, facilities should notify in writing all parties potentially involved in the problem.

Facilities need to identify not only what went wrong, but also all of the negative aftereffects (which are the damages facilities will seek from defendants in a potential lawsuit). In reviewing these aftereffects, you should be careful to include all of the costs associated with them. Did a vendor's Y2K problem result in decreased reimbursement? Cause a resident to leave the facility? Result in a lawsuit? All of these costs might be recoverable.

In some cases, a party who is damaged by a Y2K problem might be able to bring a breach of contract action if the contract with the party contained promises or reassurances about the vendor's Y2K compliance. While other common law and state law remedies, such as violation of state consumer fraud laws, might apply, facilities should be aware that in July 1999, Congress passed legislation known as the Y2K Act that specifically addresses Y2K problems. The Act applies to any action brought after January 1, 1999, for a Y2K failure occurring before January 1, 2003, or potential failure that could occur or has allegedly caused harm or injury before January 1, 2003. The Act does not apply to personal injury claims, wrongful death suits or actions under federal securities laws.

Under the Act, an individual or entity that believes it has suffered harm from another party's failure to be Y2K compliant must communicate with that party at least 90 days before filing a suit. Congress hoped that mandating this communication could prevent some lawsuits altogether. This communication must be done in writing, sent via certified mail and contain the following information:

1. Any symptom of any material defect deemed to have caused loss or harm;

2. The harm or loss allegedly suffered;

3. The facts that led the prospective plaintiff to hold the potential defendant responsible;

4. The relief or action sought by the prospective plaintiff; and

5. The name, title, address and telephone number of any individual who has authority to negotiate a resolution of the dispute on behalf of the prospective plaintiff.

Within 30 days of receiving this notice, the party that allegedly caused the harm must send a written response describing the action it will take to address the problem and whether the party is willing to attempt to negotiate a solution. If the party that allegedly caused the harm does not respond within 30 days, the party that was harmed may immediately file suit.

The Act also limits the ability of a party that has been harmed to collect punitive damages. Punitive damages are generally awarded by courts as a punishment beyond the damages experienced by the plaintiff. Under the Act, a plaintiff may only be awarded punitive damages if it can show that the defendant's conduct "showed a conscious, flagrant indifference to the rights or safety of others and was the proximate cause of the harm or loss that is the subject of the year 2000 claim." In those cases in which punitive damages are allowed, they are generally capped at the greater of three times the amount of the plaintiffs compensatory damages or $250,000. For individuals whose net worth does not exceed $500,000, unincorporated businesses, partnerships, corporations, associations or organizations with fewer than 50 full-time employees, punitive damages are limited to the lesser of three times the plaintiffs compensatory damages or $250,000.

Because Congress wanted to ensure that parties took all possible steps to avoid Y2K problems, the Act prohibits a plaintiff from suing for damages if the plaintiff "could reasonably have avoided [the problem] in light of any disclosures or other information of which the plaintiff was, or reasonably should have been aware...." This limitation does not apply if the plaintiff relied on representations by the defendant that the defendant knew were false. Prior correspondence and discussions with vendors might become critical in proving your reliance on these statements.

An additional limitation under the Act is that a defendant might be able to avoid liability if it can show that the problem was the result of a "Y2K upset," i.e., an exceptional incident involving temporary noncompliance with applicable federally enforceable requirements because of factors beyond the reasonable control of the defendant. To establish this "affirmative defense," a defendant must demonstrate that:

1. It had previously made a good-faith effort to remediate Y2K problems;

2. A Y2K upset occurred as a result of a Y2K system failure or other Y2K emergency;

3. Noncompliance with the applicable federally enforceable measurement or reporting requirement was unavoidable in the face of a Y2K emergency, or was intended to prevent the disruption of critical functions or services that could result in the harm of life or property;

4. Upon identifying the noncompliance, the defendant began immediate actions to remedy any violation;

5. The defendant submitted notice to the appropriate federal regulatory authority of a Y2K upset within 72 hours from the time that it became aware of it.

The following are specifically exempted from qualifying as a Y2K upset:

1. Noncompliance with applicable enforcement requirements that would constitute or would create an imminent threat to public health, safety or the environment;

2. Noncompliance with applicable federally enforceable requirements that provide for the safety and soundness of the banking or monetary system, including the protection of depositors;

3. Noncompliance to the extent caused by operational error or negligence;

4. Lack of reasonable preventive maintenance;

5. Lack of preparedness for Y2K.

If you feel that your facility has been harmed from a Y2K failure, you should immediately consult your attorney.

Matthew J. Murer is an attorney with the firm of Duane, Morris & Heckscher, Chicago. Contact Mr. Murer at [phone]; fax [phone]; or e-mail: [e-mail].